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The Automotive Supply Chain


Design (High Value Added) - After researching consumer wants and needs, automakers begin designing models which are tailored to the public demand. In the past, this design process has taken up to five years. Today, however, through the extensive use of computers, it is possible to develop prototypes, or "concept cars," from sketches in less than a year.

Raw Materials (Low Value Added) - These include rubber, glass, steel, plastic, and aluminum. Over the past few years, the cost of raw materials has increased significantly, mostly due to the price increase of oil and natural rubber. Also, companies are now using aluminum and plastic in place of steel whenever possible in order to lessen the weight of the automobiles, which in turn improves fuel efficiency.

Parts (Medium Value Added) - Tires, windshields, and air bags are examples of parts. While the automobile industry as a whole has become more consolidated, the U.S. auto parts sector remains highly fragmented. It includes four primary sub-categories: original equipment manufacturers (Delphi and General Electric), replacement parts manufacturing (Cooper Tire and Rubber and Federal-Mogul), replacement parts distribution (NAPA), and rubber fabricating (Goodyear and Cooper).

Assembly (Medium Value Added)- Due to the combination of rising raw materials' costs and consumers' eternal search for the lowest price, companies are looking for ways to cut costs out of the manufacturing process. Recent trends to reduce costs include using fewer parts in each vehicle component, minimizing industrial waste and pollution, and having parts delivered to assembly plants on a just-in-time basis.

Marketing (High Value Added) - Marketing is an integral part of the value chain, since it is the primary basis for consumers' perceived values. Automakers and individual dealers work together to create national, regional, and local marketing strategies. These may include television and radio advertising or special incentives offered to customers. In addition, firms have started advertising more online. GM, for example, spent 67% more on online advertising in 2005 than it did in the previous year.

Distribution and Sales (High Value Added) - After production is complete, automobiles are shipped to dealerships around the world to be sold. As mentioned previously, dealers may offer incentives to increase sales.


Who Drives the Supply Chain?

Once a quintessential example of a producer driven industry, in recent years the automotive industry has started to become less producer driven and more buyer driven. Ever since the invention of the Japanese lean production model of production and the "just in time" era automobile makers have slowly made a transition into catering automobiles to its' customers wants enough that it now determines the design and modeling of new vehicles. The automotive industry's move toward a buyer driven market is also apparent in how cars are slowly becoming more customizable from the factory rather than through aftermarket parts. An example of this is Toyota's Scion vehicle lineup, which allows you to choose to change certain customizable features that go beyond the loaded and fully loaded choices once available to consumers.

Also, the characteristics that signal a move toward the buyer driven model are more apparent in countries that have a longer use of passenger vehicles, such as the US, because the market has become saturated and has become a replacement market where choice matters. On the other hand, countries that are being introduced to the concept of personal passenger vehicles do not need a plethora of choices and will take whatever they can get - just like the first Model T's in America - which doesn't lend the market to much influence from consumer choice.

Lastly, tight consolidation of the auto industry's major firms have started to disintegrate as the global economy now requires any firm in tight competition to focus on its core competencies and outsource, or even offshore, work that can be done cheaper elsewhere. Even the Keiretsus of Japan whose success is many times attributed to their tight knit support system and arms length nature of horizontal and vertical business relationships are experimenting with the idea of purchasing parts for production from those who can provide better material for a better price rather than from those who they merely have longstanding relationships with.

Source: Standard & Poors[1]

Next: Overview of Major Firms


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